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A Defense of Shareholder Favoritism

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Author Info
Stephen Choi (Professor of Law, University of California, Berkeley)
Eric Talley (University of Southern California Law School)
Abstract

This paper considers the efficiency implications of managerial "favoritism" towards block shareholders of public corporations. While favoritism can take any number of forms (including the payment of greenmail, diversion of opportunities, selective information disclosure, and the like), each may have the effect (if not the intent) of securing a block shareholder's loyalty in order to entrench management. Accordingly, the practice of making side payments is commonly perceived to be contrary to other shareholders' interests and, more generally, inefficient. In contrast to this received wisdom, we argue that when viewed ex ante, permissible acts of patronage toward block shareholders may play an important efficiency role that benefits all shareholders alike. We demonstrate that the prospect of having to share rents with a third party may itself have a deterrent effect on managerial self-dealing - an off-equilibrium benefit that would not be readily apparent if one looked only at instances where favoritism actually occurs in practice.

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Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number 1026.

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Date of creation: 01 Jul 2001
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Handle: RePEc:cdl:oplwec:1026

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  1. Easterbrook, Frank H & Fischel, Daniel R, 1983. "Voting in Corporate Law," Journal of Law & Economics, University of Chicago Press, vol. 26(2), pages 395-427, June.
  2. Zvika NEEMAN & Gerhard O. OROSEL, 1999. "Corporate Vote-Trading as an Instrument of Corporate Governance," Vienna Economics Papers vie9904, University of Vienna, Department of Economics.
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  3. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April. [Downloadable!] (restricted)
  4. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January. [Downloadable!] (restricted)
  5. Zwiebel, Jeffrey, 1995. "Block Investment and Partial Benefits of Corporate Control," Review of Economic Studies, Blackwell Publishing, vol. 62(2), pages 161-85, April. [Downloadable!] (restricted)
  6. Andrei Shleifer & Lawrence H. Summers, 1988. "Breach of Trust in Hostile Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 33-68 National Bureau of Economic Research, Inc. [Downloadable!]
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